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While Chinese cities are growing at an unprecedented pace, much of this growth isn’t what most city planners would consider “smart” — that is, growth that is efficient, equitable, and environmentally sustainable. Instead, most Chinese cities are experiencing high levels of sprawl. This has led both Chinese and international pundits to focus on the issue of Chinese sprawl, with some even asking why Chinese cities haven’t learned lessons from American cities. Is sprawl a sign that Chinese leaders don’t know what they’re doing?

In theory, sprawl can be limited by good planning. In practice, sprawl is an exceedingly challenging phenomenon to stop. Though there are numerous complex reasons for the growth of Chinese sprawl, there are three systemic factors driving Chinese cities’ expansive growth: unprecedented Chinese growth, local government budget dependence on land sales, and the importance of GDP growth in the Chinese political promotion system.

Unprecedented Chinese Growth

In a way, building cities is a lot like playing a game of Tetris — waves of incoming population and development fall like Tetris blocks. In theory, a player wants to pack in the shapes as tightly as possible, limiting gaps and completing as many full lines as possible. And that’s the strategy most players use at the beginning of a Tetris game when the pace is slow.

As the pace of the game increases, perfectly combining these blocks becomes a lot harder. The need to place blocks smartly is superseded by the need to respond quickly; players begin to haphazardly drop blocks to avoid disaster and keep playing as the pace of the game increases.

If you watch someone playing Tetris and they’re almost out of room to stack new blocks, it doesn’t necessarily mean the player didn’t have a strategy; it just means that they didn’t have time to respond, or didn’t correctly anticipate which pieces would actually appear.

City planners in major Chinese cities are playing a high-speed game of planning Tetris. They’re trying to place the metaphorical pieces as quickly and logically as possible. Like a Tetris player, they don’t always know which pieces will come next.

In a vacuum, some moves may look peculiar, but Chinese planners and local officials are often doing their best to keep “the game” going. In a game of Tetris, this means stacking blocks higher and less efficiently than you’d like; in Chinese cities, this means pushing development further away from the center of the city.

As of now, there isn’t an equivalent to a maximum number of rows in Tetris, so it makes sense to keep building Chinese cities outward. In this way, Chinese sprawl isn’t “dumb” growth; it is perhaps just “as smart as growth conditions will allow.”

Chinese Cities Depend on Growth

Cities throughout the world derive financial benefits from growth; however, tax structures benefit each place in different ways. One underrated but exceedingly important factor in the growth in Chinese cities is their land tax structure.

In many places (including the United States), cities have financial incentives for smart, compact development, particularly for property taxes. The higher quality of development, the higher the assessed value of the land that it sits on, and the higher level of property tax that a municipality collects from the property owner. These taxes are collected on an ongoing basis, giving municipalities strong incentives to provide quality services to these areas to keep them from losing value (and thus decreasing property tax collections).

Unlike places like the U.S., the Chinese government owns all land within its borders; to raise money, local Chinese governments divide up parcels of land and sell development rights to developers and investors. There is no post-development property tax. Therefore, Chinese cities receive a majority of their financial gain from growth at the beginning of the development process.

The money received from selling these development rights often make up close to 30% of a city’s income, so city officials face a tough decision: do they encourage smart, compact growth that limits the amount of land they sell, or do they chase short-term cash infusions by selling development rights to land further from the city center? Even if you’re a huge proponent of environmental protection, it is easy to understand why this is a hard choice for local officials.

The Chinese land tax structure also creates perverse incentives to investors to build in unnecessary places. In places with high property taxes, investors are discouraged from holding property for a long time, as they are required to continually pay taxes on this property. Over numerous years, tax payments add up and cut into overall profit when these developments are sold. In China, however, investors (particularly those with low financing costs) can sit back and (theoretically) wait for demand to pick back up again. While investors wait, buildings with unsold space sit empty; some pundits have speculated that this has fueled the growth of Chinese ghost cities.

Politics

The structure of the Chinese political system also encourages unchecked growth that results in sprawl. This is because the Chinese political system works a lot like the farm system in Major League Baseball, with most officials beginning at lower levels (county & city) and moving to higher levels (provincial and central). Officials with strong track records (and strong guanxi) have the best chance to rise within the party to higher levels of government with greater amounts of power.

Encouraging smart, compact growth becomes a risky decision. If smart growth policies slow cities’ growth, they not only endanger municipal budgets but also jeopardize political careers. In this light, Chinese sprawl isn’t the result of incompetent technocrats who don’t know what they’re doing; instead, it’s the result of Chinese politicians recognizing the importance of this growth in progressing their political career.

So why are Chinese cities sprawling? It is not because local, provincial, and national officials don’t recognize that current growth patterns aren’t environmentally or financially sustainable. Instead, the financial and political incentives built into the Chinese system favor fast, “dumb” growth rather than slower, “smart” growth. The challenge of accommodating a large inflow of rural migrants is exacerbating these pressures.

Local government officials didn’t write the unofficial rules that dictate city growth. Sprawl isn’t necessarily a sign that they don’t know what they’re doing; rather, it’s potentially a sign that the “rules of the game” push them towards unsustainable policies. Chinese sprawl is not inevitable; rather, to push Chinese development towards a more sustainable path, officials at all levels of government will have to consider how they can reform the “rules of the game” to encourage smart, sustainable growth.

It is virtually impossible not to marvel at China’s new subway systems after spending some time in a city like Beijing or Shanghai. The relatively new subway systems allow for convenient and affordable (albeit crowded) way to travel around these cities. These infrastructure investments will certainly leave a lasting impact on Chinese cities for years to come, but what will this legacy be?

On one hand, this massive commitment to public transportation could be interpreted as China learning the lessons from American sprawl, suburbia, and private car ownership. On the other, we could be looking at the development of sprawl with Chinese characteristics, with subway systems playing the same role as the American interstate.

Urban planners generally consider sprawl to be bad- but why? Above all else, sprawl is environmentally and economically wasteful. By spreading out where people live, sprawl leads to infrastructure redundancy and the conversion of undeveloped land — land that could be used for agriculture or simply natural environment preservation (which provides a wealth of environmental services like improving air and water quality) — into developed land. Additionally, the further people live from where they work and play, the more likely they are to travel to those places by carbon-intensive modes of transportation (primarily the private automobile).

Sprawl is the major defining characteristic of 20th century American growth.While there are numerous reasons why this is the case (including Federal housing policy that encouraged home ownership), one theory that helps urban planners understand sprawl and suburbanization is the bid rent theory. At the heart of this theory is the idea that choosing where to live or set up a business is about balancing access to lots of people and rent prices; land users’ willingness to pay rent is dependent on their need for access to the central business district (i.e. downtown).

Commercial services and retail (the blue line on the graph in Figure 1) benefit the most from close proximity to downtown, its density, and its high concentrations of people; therefore, commercial and retail entities are willing to pay the highest levels of rent, and the areas closest to downtown are generally dominated by commercial businesses.

Manufacturing and large retail (the green line) benefits some from access to people who work in factories and buy goods, but it also requires a greater area of land to set up production facilities; therefore, manufacturers and larger businesses often locate outside of expensive downtown areas but still somewhat close to the center.

Finally, though living in the center of a city is very convenient, housing prices (i.e. rent) are quite high. Residential uses (the red line) are generally seen to benefit the least from access to downtown, so people therefore are willing to live further away from the city center. The further one move out of the city center, the lower housing prices become; therefore, the outer regions of cities are usually dominated by residential development. When the lines on the graph are translated into a two-dimensional map, the city is divided into concentric zones. The spatial distribution of commercial, manufacturing, and residential areas under the bid rent theory can be seen in Figure 2.

Though the bid rent theory has its own limitations, it still provides a helpful way to understand American cities. In addition to the obvious information on willingness to pay rent for access to downtown by sector, bid rent graphs contain another important piece of information about consumer preference: the point at which each line crosses the x-axis (or where the rent becomes 0). The residential line is particularly important, as it shows the distance away from downtown where developing residential land becomes impractical (i.e. the land is worthless); in practice, this represents the outer boundary of cities.

Before the development of interstates, city size was greatly limited by travel time. Even though land exists beyond where the residential line reaches the x-axis, additional non-financial costs (particularly commute time) made living in these areas impractical. The American interstate system had a profound effect on the slope of the residential line on the bid-rent curve. Interstates, with higher speed limits and limited stops, significantly reduced travel times from employment in city centers to housing miles away, thus reducing the non-financial cost of living far away from downtown. As the residential line became flatter, and the x-intercept moved further away from downtown (see Figures 3 & 4); this means that previously impractical land became a viable option for some individuals. Cities, once limited in size by travel time, were able to expand far further than they were before interstates. Fifty years later, interstates have allowed cities like Atlanta and Houston to sprawl to incredible levels.

It’s easy to dismiss sprawling Chinese cities as inevitable, due to the large size of the population in an average Chinese city. However, the same factors that led to American sprawl (particularly a strong desire for homeownership) are also very important parts of Chinese culture. If homeownership is a significant priority yet housing prices remain unaffordable, the only option is to move further away from the city center.

If an individual’s only transportation options are buses, bikes, or even cars, non-financial costs like travel time would effectively limit the size of Chinese cities; however, land further from the center becomes more attractive when citizens have access to high-speed transportation options like subway.

Much like interstates did to their American counterparts, Chinese subways will flatten the residential bid-rent curve and allow for Chinese cities to grow increasingly expansive. Though this may not seem like a major problem, increasing the distance from downtown to city borders by 25% means increasing the total developed area by 65%. That’s a huge amount of land that could be used for other purposes like farming and environmental services.

There is a very compelling case for building these subways. The most compelling case is that China’s major cities are inevitably going to continue to grow. If Chinese cities do not develop extensive transportation infrastructure, then they may pay a major price in the future as they battle traffic congestion, environmental degradation, and high real estate prices (due to limited housing supply).

Alternatively, one could also argue that outward urban growth is not inevitable; in its place, cities would either become increasingly dense or people would just choose to move to smaller, less expensive cities. Some urban planners argue that American cities are reaching “peak sprawl” due to suburban developments reaching reasonable limits on individual travel time from job centers; is it possible that Chinese cities would reach the same point?

By increasing the area where city residents can reasonably commute to the city center, local governments are making land that was previously unappealing due to its distance from the city center more appealing (i.e. inducing demand). Rather than reducing traffic congestion, it could instead be enabling more people to move to these cities than would otherwise be feasible. This would put significant stress on existing infrastructure, encourage redundant infrastructure, and decreases green space surrounding cities.

Building these major subway systems can also pose major systemic issues to Chinese cities over the upcoming years and decades. Over the past decade, China has been grappling with high real estate prices. In the short-term, the government decreases the necessity of dealing with high real estate prices in city centers by increasing the overall supply of developable land through subways. Long term, as individual purchasing power increases and more people buy cars, more individuals may transition from public transit like subways to personal cars.

Chinese cities face problems that are unprecedented in both size and scale. Planning cities under these conditions is extremely challenging, and building massive transportation infrastructure is a logical way to manage the challenges that come with massive growth.

It’s easy to marvel at the sheer size and speed of growth of Chinese transportation systems. That said, the growth of Chinese subway systems isn’t necessarily a sign that China is fighting off American-style sprawl and suburbia; rather, it may setting the foundation for sprawl with Chinese characteristics.

Nothing threatens the stability of China’s economic miracle more than the hazardous levels of pollution generated by rapid development. The rise of the private automobile, unregulated toxic factories, and the widespread use of coal-burning as an energy source have all contributed to environmental degradation across China’s cities. While in the past, these issues were swept under the rug in favor of economic growth at all costs, the rise in living standards means that China’s leadership can no longer ignore the concerns of the people they serve.

China is now at a crucial turning point where economic goals must be balanced with considerations for the environment going forward. This is not an easy problem to tackle and the solution will require a global effort.

The new book The People’s Republic of Chemicals serves as an excellent starting point in understanding how China’s pollution problem got so out of hand in the first place and what can be done to stop it (or at least slow it down). The book’s co-authors, William Kelly and Chip Jacobs, are appropriate storytellers having together written the 2008 book Smogtownabout the rise and fall of pollution in mid-century Los Angeles.

William took the time to answer some questions for us about their new book:

Adam Mayer (AM):As you observe in your previous book, Smogtown, Los Angeles has done a good job of cleaning up its air in a relatively short amount of time. Aside from the rise of use of catalytic converters for cars, how much does this have to do with the fact that L.A. is no longer a manufacturing powerhouse for the aerospace industry? Using L.A. as an example to learn from, how can China move away from manufacturing to services without sending shockwaves through its economy?

William Kelly (WK): In history, sixty years seems like a short time, but for those who lived it in Los Angeles it seemed like forever, especially for the roughly 10 percent of the population that suffers from asthma and other chronic respiratory diseases. And bear in mind the air in Los Angeles is still unhealthful, though much less so than even in the 1990s.

Aerospace really was a fairly minor source of air pollution in Los Angeles and its downsizing had more to do with the end of the Cold War, consolidation in the industry and the rise of Airbus and other competitors around the world. However, like virtually every other source of air pollution it was regulated and required to follow best practices and use the cleanest technology available. The fact is that around 1990, the LA area needed to cut emissions about 80 percent to meet health standards and to do that all sources had to be controlled. So the effort went far beyond the catalytic converter which was first required in the 1970s.

But without digressing, China can learn much from Los Angeles and California, but replacing manufacturing with services is not the answer. Instead, cleaning up the sources of energy in China is the key task that will bring the biggest environmental improvements, as well as much better control and treatment of waste byproducts from manufacturing that also pollute water, soil, and air.

The tragic thing we’re seeing now is that with the U.S. pushing the TransPacific Partnership trade agreement, we may replicate what happened environmentally in China in the 1990s in Vietnam, Malaysia, and other underdeveloped nations by helping to set up manufacturing that will be all coal powered. The coal plants in those nations already are being built in anticipation of the trade agreement.

AM:One of the more recent developments in China is the proliferation of citizen protests against new chemical factories. In your research, did you find this phenomenon to be widespread? How is the government (both local governments and the central government) reacting to these protests?

WK: The protests have been widespread, persistent, and often violent. The reason stems from fear of releases, particularly potentially catastrophic releases from chemical plants, but at the root is distrust of the public officials charged with regulating these plants.

Here’s a fact Americans might find hard to believe. In a nation with more than three times as many people as in the U.S., the Chinese equivalent to the U.S. Environmental Protection Agency has fewer people than work at the Natural Resources Defense Council, a few hundred. That’s in a nation that covers more land area than the U.S. too. Obviously that’s inadequate.

So as a result, the enforcement of standards largely falls on local and provincial government personnel, who are under the thumb of local and provincial Communist Party officials who are constantly wined and dined, if not controlled by industrialists. The common people know this, so they feel left to their own devices when these plants come to town.

The key to gaining trust here is for the national government to build up its capacity to enforce environmental laws and standards and for the national government to exert more control over provincial and local party officials by making their compensation and promotion contingent on environmental as well as economic performance.

AM:Perhaps most detrimental to China’s air quality is the widespread use of coal-burning as a power source. Given China’s growing demand for energy, and the cheap cost of coal as a resource, what are the necessary steps that the country needs to take to incentivize cleaner sources of energy? Is this already happening? If so, how?

WK: First, coal is the biggest cause of air pollution in China, particularly the terrible particle pollution we see in the pictures.

Solving the problem, therefore, is easy as ABC, anything but coal. Fortunately, China’s historic strength is in bringing technologies to scale, from the canals and roads of the dynastic days, to the great outpouring of digital devices we see today.

Now the nation is successfully turning to solar and wind power, where it’s become a leading nation both in manufacturing solar panels and wind turbines, and also deploying them in its grid. Indeed, China is the world’s biggest solar panel manufacturer.

Now, it’s beginning to do the same by turning to advanced batteries to store intermittent renewable power so it will be there at night and when the air is still. Coupled with the energy efficiency inherent in denser, urban living in small quarters we can hardly fathom in the U.S., China could be the next nation after Germany to get huge amounts of energy from renewable sources. In fact, it’s happening most energy analysts agree.

All that the Chinese have to do is follow Deng’s advice, to “be brave” and “walk with faster steps” when it comes to moving to renewable energy and to drop further development of coal.

AM:Looking ahead, do you think that urbanization will eventually lead to a better environment in China? In other words, once the new cities are built and the infrastructure is in place, will we look back on the last 3 decades as a small sacrifice paid for what could ultimately be a sustainable urban future with an intelligent grid, efficient public transit and green buildings? Or has the pace and scale of urbanization taken a toll on the environment that can never be rectified?

WK: When it comes to what China is doing with public transit, housing, and amenities for its people, one could argue it puts the U.S. to shame. In many ways, we have much to learn.

Clearly, even the casual visitor can see China is making a lot of the right moves on transportation and urbanization, moves that are setting it on a path when it’s fully developed toward much lower emissions per capita than in the U.S.

The danger is, however, that continuing to rely on coal to build out its cities will do irreparable harm to the world’s atmosphere by pushing up carbon levels to the point that triggers runaway global warming. The Chinese leadership ultimately is coming to grips with this, but needs to embark on a crash program to transition to clean energy.

Given their great communitarian tradition and amazing technical ingenuity—remember they had vastly superior technology to Europe even at the time of Marco Polo—the Chinese are fully capable of doing this, in fact leading the world on it. The ability is there, all they need to do is muster the resolve.

More can happen in two years in a developing country like China than can happen in a decade or more in developed countries. And given this high speed of change, the information in business books about China’s economy can go out of date really fast.

That is why it is not surprising that although it has only been a little over two years since China analyst Shaun Rein released his first book, The End of Cheap China, he is back with another one. In that time span, China got a new leader in Xi Jinping, the one-child policy was significantly reformed, and Alibaba, the country’s biggest internet company, went public on the New York Stock Exchange.

The End of Copycat Chinais a natural follow up to End of Cheap China (which we featured a review of on this blog not long ago) and looks to build upon the research he’s been doing for the past decade on the ground in China.

I recently had a chance to chat with Rein about his new book and ask some questions about what he’s seen change in the past two years and, more importantly, the trends he sees influencing China’s development in the near future.

Adam Mayer (AM): Your previous book The End of Cheap China asserted that China is moving up the value chain from a land of cheap manufacturing to higher-end manufacturing and services. Since then, how have your initial observations been validated? Where is China today versus when you were doing research for your first book?

Shaun Rein (SR): When End of Cheap China first was released, many critics pounced on me and said that China would always be a low-cost manufacturing center. Over the last three years, however, my thesis has been proven right as labor and rents have gone up in double digits year on year in the manufacturing sector — China no longer is a cheap place to produce products. Companies like Nike have started sourcing more from even cheaper markets like Vietnam and Chinese footwear manufacturers like Huajian have opened factories in Africa. When even the Chinese relocate to Africa in search of lower costs, that is when you know there is a tectonic shift in supply chains needed.

I also argued in End of Cheap China that China would not lose its manufacturing dominance because it has superior infrastructure and the necessary eco-system for manufacturing — I said that Chinese firms would move up the value chain which they have done. What might surprise people is just how fast many companies moved up the value chain. They are no longer transferring technology from western nations like Germany and the U.S. but actually focused on innovation which is where my new book begins.

AM: The title of your new book The End of Copycat China also suggests the ‘end’ of something China is known for (intellectual property transfer in this case) as a signal for its next phase of development. Is the perception of China as a land of copycats still a reality?

SR: Chinese firms were copycats for the most part of the last thirty years. The main reason was that there was so much low-hanging fruit to simply transfer technology from the West directly into China and to customize if needed for local markets. It was easy for well-connected (and corrupt) people to get land on the cheap and put up skyscrapers or secure long-term monopolies supplying various government agencies. But now that costs are so high and the public equity markets are giving high valuations to innovative Chinese firms like Alibaba and Tencent, Chinese companies are focusing on innovation more and more — it would be a mistake to discount their ability to innovate. This is a natural progression to what happening in South Korea and Japan.

Yesterday I was at Lotte World Amusement Park in Seoul. From the term ‘cast members’ to Indiana Jones look-alikes, even Lotte is seemingly knocking off Disney and the George Lucas/ Stephen Spielberg franchise.

Intellectual property was and remains a concern so it did not make sense for companies to invest millions of dollars in innovation because someone would likely steal it. When I interviewed top entrepreneurs in the book — and I interviewed the founders of JD.com, Qunar, Tudou for instance as well as the former CEO of Alibaba.com and an angel investor in Xiaomi — property rights and lack of enforced was an issue many brought up towards a barrier for innovation in China. That said, the situation is getting better as the government is more likely to move to protect the interests of domestic Chinese firms hurt by copyright infringement than western players.

AM: Is there now a broad consensus among policymakers and business leaders in China that the country must innovate in order to continue on its path of economic reform? What are some examples of businesses or policies you’ve come across in your research that align with this goal?

SR: The Chinese government has definitely set the goal of innovative businesses taking up a larger part of the economy. Local governments are setting up innovation parks, like they did with the IT parks a business generation ago. Frankly, I am not sure that these initiatives will work as great innovation tends to occur in the private sector, often in small teams of entrepreneurs who think they can change the world. Chinese bureaucrats despite good intentions often do not understand and thus do not support new technologies which can hamper innovation.

That said, one sector that the government actively supports for innovation and which is seeing great growth is the bio-tech sector. Probably more than any sector I interviewed, except maybe mobile, biotech entrepreneurs were the most optimistic in China precisely because of the support the Chinese government is giving the sector from funding, equipment and opportunity to cooperate with academic institutions. Many said that the climate is better in China than in the US because of Obama administration funding cutbacks.

AM:Apple famously touts its products as “Designed in California, Assembled in China”. This statement implies superior innovation power over Chinese counterparts. Yet with domestic Chinese businesses such as Tencent and Alibaba becoming more confident as innovators in their own right, what are the implications for Western businesses who have always felt safe in their role as the ‘innovators’ while using China as a factory?

SR: For years the ‘Made in China’ label had negative connotations as being cheap, dangerous. For much of the market that is true but can no longer work going forward. The first half of my book is focused on innovation — the second half is looking at consumer trends and how Chinese are moving away from copycatting the western dream of beauty and life as they define the new Chinese dream.

Importantly, there is a new found pride in Chinese-ness. Top Chinese firms like Xiaomi and Tencent are not hiding their Chinese heritage — Chinese consumers love it, support that move. For western companies, they need to understand that top Chinese firms are going to become global players competing on innovation and no longer the cheap but good enough positioning many Chinese companies competed with before.

AM: Your last book devoted an entire chapter to the real estate industry in China. To what extent does your new book discuss this topic and what are the implications for real estate as China’s economy shifts from one of manufacturing to services?

SR: Real estate plays a key theme in my book — including the high rents that are forcing retailers to think about e-commerce. The real estate sector in China obviously has some issues but they are not as serious as many analysts seem to fret. Prices might soften in the residential sector but there is little leverage in the marketplace. I am more concerned about some of the commercial developments that have gone up in the past few years because developers put too many Louis Vuitton stores as the anchors. The market can only sustain so many LV stores, especially with the anti-corruption crackdown.

But real estate is actually pushing forward a lot of innovation. I had an interview set up with Zhang Xin the CEO of Soho but it got cancelled last minute so I wasn’t able to include anything on Soho in the new book. But pollution has become such a problem in China that it is developers like Soho that are investing in the newest forms of technology for cleaning air, reducing carbon footprints. Chinese real estate developers are really at the clean technology forefront.

Thanks to Shaun Rein for taking the time to answer some questions for us. Please be sure to check out his new book The End of Copycat China.

View over Victoria Harbor towards Central- the center of the pro-democracy protests

Hong Kong is an unlikely setting for massive political protests. The city, known for its open global trading culture, is a paragon of economic freedom. Yet many would argue that the economic freedom enjoyed by Hong Kong’s citizens has not kept pace with the level of political freedom.

Case in point: at the time of this writing, pro-democracy protests in Hong Kong have taken over the city; spilling over from the city’s central business district of Central into the neighborhoods of Causeway Bay and to Mong Kok across the harbor in Kowloon. Prompting this unprecedented massive protest was the Chinese Central Government’s decision last month to allow only committee-approved candidates to run for Chief Executive (Hong Kong’s highest political office) in what was supposed to be the city’s first public vote in 2017.

Beijing’s decision to vet Chief Executive candidates before they are permitted to run for office sent a signal to Hong Kong citizens that perhaps the Central Government is not fully comfortable embracing the idea of ‘One Country, Two Systems‘. That being said, while on the surface this appears to be primarily a political protest, underlying much of the frustration of protestors are economic issues resulting from a flood of Mainland wealth entering Hong Kong.

To understand why this may be the case, it is important to look at Hong Kong as a ‘city’ first rather than a former British Colony and current Special Administrative Region of China.

As anyone who has visited the city knows, Hong Kong is one of the most compelling urban places in the world. Spanning across Victoria Harbor, from Hong Kong Island to the Kowloon Peninsula and beyond to the New Territories, the city’s natural geographical setting is stunning. Add to that the forest of svelte skyscrapers against a backdrop of steep mountains and you get a visual dynamism that is unmatched by any other city.

Urbanistically, Hong Kong functions like a well-oiled machine. The always on-time metro system spans to the far reaches of the city and mixed-use developments everywhere promote lively street-level activity. The city’s airport is one of the most well-connected and efficient in the world. The tourism/hospitality industry is gold standard and booming.

Given all the assets possessed by the city, what then is Hong Kong’s problem?

Short answer: the cost of living is out of control.

In a sense, Hong Kong is a victim of its own success. Thanks to its open banking system, global capital flows into the city relentlessly. Investment in Hong Kong property, primarily from wealthy buyers from Mainland China, drives up the price of real estate to astronomical levels out of reach for most locals.

Exacerbating the housing affordability crisis in Hong Kong is the lack of land to build new real estate to meet the high demand. Demographer Wendell Cox’s research has even found Hong Kong to be the world’s most unaffordable housing market.

The protests in Hong Kong are directed at the Chinese Central Government, but they might as well be directed at China’s capital flows into the city. To put it into perspective, this is a semi-autonomous highly developed city of 7 million, adjacent to a developing country of 1.3 billion. Hong Kong is the closest safe harbor for wealthy Mainlanders to put their money. On top of that, millions of Chinese tourists come to Hong Kong each year to go on shopping sprees, buying luxury goods, sales-tax free, that would be more expensive to purchase in the Mainland.

Given the severity of the situation, it is no wonder that native Hong Kong citizens are taking to the streets in protest. Yet as Hong Kong is already a relatively free city, unfortunately I do not think that more ‘democracy’ will help the solve the problems that Hong Kong protestors are most concerned about (cost of living, loss of cultural identity, etc…).

On the contrary, the solution for the city’s woes would be for the rest of China to become more like Hong Kong. That is- more global, economically open and possessing a banking system that investors can trust. Mainland China is not there yet, but proposed initiatives such as merging the Pearl River Delta into an interconnected ‘mega-region’ and the Shangahi Free-Trade Zone are steps in the right direction.

Ultimately the point is to take the pressure off Hong Kong. This could be achieved by making other cities in China, such as Shenzhen or Shanghai, more open economically, so that capital flows more freely through the Mainland.

The Chinese government up until now has hesitated in doing this. Perhaps the protests in Hong Kong will be a wake-up call to speed up reform. My feeling is that this will happen eventually and hopefully sooner than later.

The Economist Intelligence Unit (EIU) shared with us their new study on “China’s Urban Dreams 2014″ – an update on the country’s urbanization program. With all the uncertainty about China’s property sector in the news recently, this in depth analysis gives some clarity to the often murky topic of Chinese development.

While Western media tends to paint China with one large brushstroke when discussing the country’s property sector, the reality is that real estate markets vary greatly from region to region. China, like the U.S., is a large, diverse country with many different cities and regions with varying strengths and weaknesses. If there is one takeaway from the EIU study, it’s that not all regions are created equally, and going forward, there are bound to be winners and losers.

Before we delve into the details of regional urbanization trends, let’s take a look at where China as a nation stands today. The country’s urbanization ratio is right around 50%, pretty much on target with the Chinese government’s projections. China’s per capita GDP is still relatively low- above India and Nigeria but below Brazil, Russia, and South Africa. Of course, China’s enormous population is a contributing factor to this being the case.

By 2020, the Chinese Government wants to bump up urbanization to 60%. This will require another 100 million people in cities. It is important to keep in mind though, that this will not only be a result of migrants explicitly “moving” to the city, but urban boundaries continuing to expand into the surrounding countryside. As cities grow in China they annex the land around them, transforming once rural land into urban real estate.

Another key factor in meeting urbanization targets is household registration (hukou) reform, which would help afford migrants a form of permanent residence status in a given city.

Where will these 100 million new urban residents live in 2020 and beyond? According to the EIU study, Guangdong Province will pick up the lion’s share of new urban development. This is not surprising given that the Pearl River Delta region is already the most urbanized in the entire world and is further developing in a manner to help better integrate the region as a whole.

Central province Henan is also urbanizing rapidly, as is the Beijing-adjacent province of Hebei. Yet both of these provinces won’t reach the urban populations projected for coastal provinces Shandong and Jiangsu.

Perhaps unsurprisingly, it is projected that the direct-controlled municipalities of Beijing, Shanghai and Tianjin will have the highest rates of urbanization by 2030. The Central Government has made it a priority to integrate Beijing, Tianjin and the adjacent province of Hebei into one large mega-region of 100 million people called “Jing-Jin-Ji“. The aim here is to take pressure off of Beijing, which suffers from traffic gridlock, pollution and astronomical housing prices.

Along with the announcement of the formation of the Jing-Jin-Ji mega-region was a move by Hebei Provincial officials announcing that some of Beijing’s Central Government functions will move to the city of Baoding, 150 km southeast Beijing. Although specifics have yet to be articulated, this is a clear indication that the China plans to decentralize its government functions.

Overall it looks as if the coastal areas of China will continue to urbanize at high rates while inland regions lag a bit behind. Although there is a wave of manufacturing moving from coastal areas to inland provinces, there still appears to be a logistical advantage being on the coast. To see where China is heading, perhaps it is best to look at the Pearl River Delta, which has led the way since initial economic reform and continues to lead the way today.

Sensationalist stories about China’s supposed looming economic collapse captivate international headlines. While these articles might be entertaining to read or talk about, they nevertheless perpetuate an inaccurate picture of an evolving Chinese economy. The really big China story is perhaps too mundane for editors looking for catchy headlines. That is, the emergence of the largest middle-class in the world- beginning with Deng Xiaoping’s reform and opening up in 1978 and still being written today.

Upon my own arrival to China nearly five years ago, it became clear fairly quick that the younger generations living in urban areas would not be content to continue working in low-wage factories and construction sites forever. Following a similar arc of modernization and urbanization that developed countries went through in the past, albeit at a much accelerated rate, China ambitiously aims to move up the value chain economically.

This development is not easily grasped for those who haven’t had the opportunity to invest significant time interacting with people on the ground in China. Luckily we have Shaun Rein and his book The End of Cheap China to tell us the story of China’s evolving trends. The book was released in 2012, but the predictions Rein makes are perhaps even more relevant today than when it originally came out two years ago.

Rein, a consultant to foreign businesses looking to succeed in the China market, is a polarizing figure among the “China Watcher” community. His critics (mostly other expatriates in China) see him as an opportunist, shamelessly networking with high-level government officials and business leaders, and presenting a naively optimistic view of China’s future. Yet it would be a mistake to suggest that Rein is in denial of the tremendous challenges facing the country. Rather, his position is based on rigorous observation and analysis of the changing values of China’s upwardly mobile population. The End of Cheap China is anything but naive, interweaving Rein’s anecdotes of personal interactions with statistics and case studies.

Rein has been in China long enough to see beyond the physical changes to observe social shifts and how they impact individuals. In a chapter titled “The Modern Chinese Woman” he tells the story of an acquaintance he made while living in the northern port city of Tianjin. “Amy”, who Rein originally met in 1997, was a bashful young waitress at a local cafe, working hard and keeping her head down.

When Rein returned to Tianjin more than a decade later and ran into Amy, he found a confident, stylish woman complete with a designer bag and trendy clothes. After catching up with her, he learned she had left her waitressing job and had been working for several multi-national companies doing business in the city. Her prospects turned out to be so good in fact, she expressed interest in becoming an entrepreneur and starting her own business. Opportunities like this abound for young and savvy Chinese urbanites. Competition is fierce in China’s cities, but compared with the chaos that ensnared the country during most of the 20th Century, there has never been a better time to be a young person in China.

Perhaps of most interest to readers of this blog is the book’s insight into China’s real estate sector, which has an entire chapter dedicated to discussing the subject. Near the beginning of the book, Rein demonstrates his deep understanding of how the real estate game works under a case study section titled “What To Do and What Not To Do in China”:

“Real estate is intentionally ramshackle. Many Westerners say Chinese real estate companies exhibit poor urban planning. A common complaint by visiting Westerners is that malls are not built attractively, or that parking lots are built on prime building locations, like on a riverside, while shopping complexes and restaurant zones are built across the street without good river views.

Criticisms like this does not survive basic analysis. Rules force developers to start construction soon after buying land from the government. It is illegal to hold on to land as an investment, so real estate developers who think land values will continue to rise either will build something as cheaply as possible, in the hopes of knocking everything down and rebuilding when prices go up, or will put up parking lots to fulfill regulatory requirements and delay prime construction on the property until later.”

This sober explanation of China’s real estate industry is not something you’re likely to read in the pages of the New York Times or one of the countless alarmist articles about China’s “ghost cities”. Rein goes on to debunk the popular opinion by perennial China bears such as economist Nouriel Roubini and hedge fund manager James Chanos that the country has over-leveraged itself on infrastructure development.

Development of new highways and rail lines (both urban metro lines and inter-city high-speed rail) might seem superfluous to outsider observers, but these transportation networks are key to successful urban development, including the availability of affordable housing. As Rein writes: “The need for less-expensive housing and commercial space will require urban areas to spread out, and for all infrastructure spending to be used on railroads, subways and airports.“

The book’s chapter on real estate does acknowledge some problems within the industry, including the lack of quality management in new commercial developments, which may cause some developers to fail. As a matter of fact, this is already happening in some cases, yet Rein points out that because commercial real estate only accounts for 20% of new construction, any serious problems in this sector are unlikely to have a catastrophic impact on the overall economy.

The underlying message throughout the book is a warning to foreign businesses to not assume that China will always just be a “cheap place to manufacture things”. On the contrary, it is important at this stage of economic development for savvy investors to seize the opportunity in selling to the rapidly growing Chinese consumer class. Granted, many foreign businesses have already seen this opportunity, but Rein warns of the competition from domestic Chinese firms such as Haier (in the home appliances market) and Tencent (in the social media space) who are developing strong brand awareness and consumer trust within the local market.

Perhaps it is fitting that this review end with a mention of successful home-grown Chinese brands as Rein recently announced a follow up book coming out in November of this year titled “The End of Copycat China“. Up until this point, Chinese companies have been seen by the international community as ‘copycat artists’ stifled by a controlling government and an inability to think creatively. Holding onto this view going forward is dangerous, not only for investors involved in China but for global brands competing for market share internationally.

Rein’s new book is bound to be insightful and timely. In the meantime, if you haven’t already, I highly recommend The End of Cheap China as an excellent guide to understanding the current state of economic development in The Middle Kingdom.

Like many foreign travelers and working expats who arrive to China, Beijing was my first port of entry into the country. Leaving Capital Airport I was struck by the massive scale of the city, overwhelmed by the repetitive concrete towers standing like regimented rows of soldiers in the skyline. Beijing’s urban form is undoubtedly inspired by the Soviet-era tendency towards grandiose urban planning schemes, but as I would come to learn the story on the ground painted a different, much more vibrant picture of urban life.

Beijing is not a city that one can fully appreciate in the matter of just a few days visiting the famous historical sites. In the space between gigantic attractions like The Forbidden City, Temple of Heaven, and Summer Palace, a modern grassroots culture thrives. Underground rock clubs, artist studios and independent coffee shops coexist in what’s left of old hutong neighborhoods as well as reclaimed industrial spaces on the periphery of the city center.

The notion of a burgeoning arts scene would seem to run counter to what many outside China still think of the city: that is, the seat of an oppressive Communist government devoted to quashing all personal freedoms. Although Chairman Mao’s portrait still looks ominously over Tiananmen Square, the perception of Beijing as a cultural desert couldn’t be further from the truth.

Arts and culture are engrained in the city’s urban DNA. Beijingers are rightly proud of their city’s long history as a cultural center, and its young creative residents continue that tradition today. Just as the infinite looping ring roads that surround the city conjure up images of Ouroboros (the serpent eating its own tail), so is the city itself in constant cyclical reinvention mode. The tremendous social and economic changes provide a fertile ground for artistic inspiration and creative freedom.

Yet there is one factor that undermines Beijing’s aspirations as a global urban creative center, and it is not the threat of government oppression. Rather, it is the layer of hazardous grey smog that envelopes the city on a regular basis.

When I first visited Beijing 2006 air pollution was already a problem, but not at quite the level it is now. When I returned to Beijing in 2009, this time moving to China for work, I noticed the pollution had become markedly worse. Thousands more cars were added to the roads and urban development was pushing out past the city’s distant 6th Ring Road. Today, the pollution levels are worse than they’ve ever been, with the density of PM2.5 particles reaching as high as 671 micrograms (or 26 times the level considered safe by the World Health Organization).

As someone with the fortune of being born in a country that is already developed and has established emission standards, I’ve been hesitant to criticize China regarding their development aspirations. Throwing stones from afar would be nothing less than hypocritical, as most developed countries also went through a “dirty phase” during rapid industrial expansion. Thus, the general tone of this blog is supportive of China’s urban development and the economic benefits it has created for the Chinese people.

Yet China’s environmental crisis is a serious threat to that process- and Beijing is ground zero for the country’s challenges. Beijing’s air pollution is a health problem for everyone in the city, regardless of class or economic status. It is an economic problem as much as it is a social problem: if the city’s residents can’t breathe clean air then urban life cannot continue to thrive. Pollution is also a real threat to urbanization, as crisis levels could prompt people to revert back to rural living despite economic opportunities offered by the city.

Encouragingly, the Chinese government has fully acknowledged that pollution is a problem and is taking proactive steps to address the issue. This includes everything from limiting the amount of automobiles on the road at any given time to decommissioning coal-fire power plants near the city.

Yet this is not enough- there needs to be a paradigm shift in the way China and other developing countries urbanize and grow their economies. This includes embracing more ecologically sensitive technologies in power generation and transportation. To incentivize using these new technologies, China is testing out a pilot cap-and-trade program in 7 cities (including Beijing). If successful, China will roll out a nationwide cap-and-trade program by 2016.

In the meantime Beijing residents will have to do what they can to stay healthy in the current environmental conditions. Sadly, until the air is cleaned up, Beijing may have to put on hold its aspiration as a global center of arts and culture, despite the exciting activity happening at the grassroots level.

As China’s state media increases its accusations of tax evasion, real estate developers are going on the defensive.

Last week, property tycoon Ren Zhiqian, Chairman of Beijing-based developer Hua Yuan Real Estate Group, posted a message on Weibo (China’s version of Twitter) calling China state broadcaster CCTV “the dumbest pig on earth“. This was in response to a program recently aired by CCTV accusing Vanke, another very large property developer, of owing more than 4.4 billion yuan (~$727 million USD) in unpaid taxes. The unpaid tax in question is the ‘land appreciation tax’ (LAT).

As a tax levied on the gains from the transfer of land development rights of state-owned land to real estate developers, the idea of the LAT is simple enough in theory but more complicated in practice. As explained in this South China Morning Post article from November:

“Land appreciation tax is collected by local governments, who have much leeway on deciding the actual tax rate. When a developer gets a pre-sale licence, it needs to pay a certain amount of land appreciation tax based on the asking price of the project. When the project is sold out, the exact amount of the tax will be calculated, deducting the cost of land, construction, marketing and other expenditures from the sales revenues, and multiplying the result by progressive tax rates.”

What this essentially means is that as a property developer increases the value of land through improvements and subsequent sales of housing units or leasing of commercial space, they need to pay a percentage of their gains to the local government. This is money due on top of what they already pay to the local government to bid on the land-development rights. The amount of money earned by local municipal governments in China on land sales is huge, accounting for about 30% of revenues.

Needless to say, as China has been going through its decades-long urbanization boom, local governments have not had to worry about a steady stream of money coming in from land sales.

Yet now China is at a tipping point.

With half the country urbanized, local governments are going to have learn to wean themselves off the land sales teat. There is also growing concern that local governments will not be able to pay back debts from loans taken out from state-owned banks used to fund the building of infrastructure.

Given this reality, it makes sense that the issue of land appreciation taxes is just coming to light. Don’t be fooled though- the accusations by CCTV are very calculated and a poorly veiled threat by the Central Government directed at country’s big real estate developers to “pay up”. It also creates a false narrative using developers as a straw-man to direct negative public sentiment towards.

No wonder Ren Zhiqian is livid.

It will be interesting to see how this plays out, especially since for at least the past 10 years developers have been the go-to guys for local governments in meeting their GDP targets (set by the Central Government ironically enough). As urbanization inevitably slows, tax laws will have to be reformed (and enforced).

Unfortunately, there is perhaps no easy way to make this transition. Clearly broadcasting exposés on state-run media against the country’s developers is only adding fuel to a potentially bigger fire.

With the ongoing spate of food safety scandals, Chinese consumers are rightly weary of the source and quality of their food. Unfortunately, food quality regulatory bodies in China remain unreliable and direct access to fresh food sources is limited for an increasingly urbanized populace. This is one of the great contradictions of China’s urban development: a country which for most of its history was majority agriculturally based is on the fast track to be one of the most urbanized nations in the world.

Status conscious Chinese urbanites would rather not associate with anything related to farming, as it evokes the recent memory of rural peasant life. For many upwardly mobile city dwellers, international restaurant chains like KFC, McDonalds and Pizza Hut are considered the best options for upper-class ‘healthy’ dining (that is, food with high caloric content).

The urban growth of China is a boon to these chains as more American consumers shun them in favor of a more organic, natural diet. The shift in American consumer preferences is reflected in the success of supermarket chain Whole Foods, local farmers markets, and the growing popularity of the Slow Food movement.

Given China’s new-found love affair with processed food and growing ambivalence about the role of agriculture, I was confident there was probably not much interest in organic farming. That was until I visited Anlong Village- a wholly organic, zero waste farm 50 km northwest of central Chengdu. With a full-time population of 3,000 residents, Anlong Village is sponsored by the Chengdu Urban Rivers Association (CURA), a local non-profit NGO.

Anlong Village was initially set-up in an effort to help clean up the Funan River, which flows into central Chengdu

Anlong Village is CURA’s flagship project, and unlike other purported ‘eco-cities’ under development in China, lives up to its claim of being 100% sustainable. The partnership was established in 2003 as an effort to help clean up the adjacent Funan River, which flows through central Chengdu, after it was discovered that most of the river pollutants come from agricultural runoff upstream.

Anlong helps abate this problem by avoiding the use of chemical pesticides and instead using natural methods to fight agricultural pests. These methods include surrounding plots with mint (a natural pesticide) and planting garden plots with a variety of different species (so if one crop succumbs to disease, it does not destroy the entire plot). This not only avoids dumping unnatural chemical waste into the river, but ensures that the farm’s soil is nurtured over the long-term.

The village also features a comprehensive composting system. Composting toilets turn waste into organic fertilizer and animal waste is recycled into concrete pits treated with anaerobic digestive microorganisms that convert it into methane gas used for heating and cooking. Plant waste is also re-used as organic fertilizer.

Organic waste is mixed together in large pits and composted naturally before being re-used as fertilizer

Throughout the village, greywater is treated in a series of specialized ponds that naturally remove pollutants. Treated greywater can then be re-used for agricultural irrigation. Constructed wetlands adjacent to the Funan River also treat greywater, assuring that potentially harmful waste water is filtered before entering the river.

Constructed wetlands treat greywater, naturally removing pollutants

Despite the initial apprehension of local government officials, Anlong Village is a tremendous success. Of the few plots available to non-Anlong residents (primarily health conscious families living in the city who tend to their crops on the weekend), demand outstrips supply.

Demand is also great for the organic produce grown in Anlong. This is in large part due to Chinese consumer mistrust of the validity of produce labeled ‘organic’ in large Chengdu supermarkets like Wal-Mart, Carrefour, or Isetan. Anlong, on the other hand, offers a trustworthy source.

Unfortunately, at this point there are very limited formal distribution channels for purchasing organic produce grown in the village. Farmers frequently venture to the city to sell their crops, but usually only those ‘in-the-know’ will know when and where exchange points are. To make it a bit easier for consumers, CURA is currently in the process of training Anlong farmers how to use microblogging sites to announce the time and location of exchange points.

An outdoor dining hall in Anlong Village. The 100% organic & vegetarian lunch I ate here ranks up as one of the best meals I’ve eaten in China

In its relatively short history as a 100% organic farm, Anlong Village is already a benchmark for other aspiring sustainable farms around China. Yet like in the U.S., there is ongoing debate about the scalability of such a model. Considering the high markup on price compared to commercially farmed crops (produce grown in Anlong can be two to three times the cost of commercially farmed produce), many argue that this method of farming is not practical to feed a nation with such a huge population as China.

In spite of this debate, and given China’s struggle with pollution as it continues to develop, Anlong Village is a blessing and a valuable reminder that practical steps can be taken to protect its environment.

The following is a guest post by Daniel Garst, a Beijing-based American writer. This article originally appeared in the March 24, 2011 China Daily Metro edition.

Nothing concentrates the mind of economic planners quite like political instability in key overseas energy suppliers. China’s new Five Year Plan therefore not only mandates further reductions in the energy used in generating economic output, but also sets, for the first time, overall consumption goals.

Making buildings here more energy efficient will be one key element in achieving these goals. A January 7, 2011 National Geographic News story states that the building sector absorbs 30% of China’s energy, a threefold increase since 1980.

Beijing has recently made notable progress in reducing energy waste in this area. A thirty percent wholesale subsidy program encourages the purchase of efficient light bulbs, while local authorities have aggressively pushed a coal-to-electricity project in hutong neighborhoods.

This program both lowers sulfur emissions and energy use, as the electric heaters are more efficient and have adjustable thermostats; some models even have thermostats pre-programmed to use less electricity during peak day hours and store it up at night. Rooftop solar water heaters are also now a common sight in Beijing’s hutongs.

Moreover, a Ministry of Construction crackdown has raised the compliance rate with the construction code calling for new Beijing buildings to use 65% less energy than their 1980s predecessors to over 90%.

However, even with this success, Li Bingren, chief economist at the Ministry of Housing and Urban-Rural Development, notes in a September 21, 2010 China Daily story that heating energy consumption in buildings here will still substantially exceed those in the west.

Fortunately, lots of room still exists for further efficiency gains. For example, heat for most residential buildings is still supplied by coal-fired boilers pumping hot water into radiators, so dwellers cannot lower or turn off the heat when it warms up or they’re out of the house.

An October 2010 University of Nottingham China Policy Institute paper on energy consumption in Chinese buildings states that 7% of the heat here is wasted when people open their windows because they have no way of controlling it themselves.

As incomes continue rising in the capital, Beijingers will demand larger flats with more lighting and electrical gadgets. This makes it imperative for new buildings to allow residents—China’s 2008 Energy Conservation Law mandates that they be charged according to the amount of heat used—to control interior temperatures.

Subsidies could also be given to residents adopting thermal technology products that automatically allocate heat to rooms with different temperature demands.

Lastly, Beijing can be much more aggressive in retrofitting not just siheyuans, but other residential units as well. The National Geographic News article cited earlier notes that Harbin has spent 1.1 million RMB to improve wall insulation and roofing in 2 million square meters of residential buildings.

Many high-rise commercial buildings also waste energy. The University of Nottingham paper notes that while such structures take up just 4% of the floor space of Chinese construction, they account for 22% of the building sector’s energy use, thanks to poor design, especially badly insulated windows.

Unfortunately, as a leading Tsinghua University Professor quoted in an April 3, 2006 story on the Science Ministry headquarters, the granddaddy of Beijing’s “green” office buildings, puts it, “local governments just want fancy post-modern designs you can brag about.”

But the newly completed Parkview Green building on the Dongdaqiao Lu, which sports a slanting environmental shield resembling a giant greenhouse, shows that such structures can be very green. In 2010, it was the first Chinese building to win the prestigious MIPIM Asia “Green Building” award. And just down the Guanghua Lu stands the Prosper Center, Beijing’s first LEED Gold certified building awarded by the U.S. Green Building Council.

While both these buildings were expensive build and are costly to lease, Beijing’s first U.S. Natural Resources Defense Council certified green building, the Science Ministry headquarters, demonstrates that green construction can be less expensive in the short- as well long-run. According to the Christian Science Monitor article on this structure, by avoiding the use of expensive materials, like marble, it cost $700 per square meter to build vs. the $850-1000 per square meter for other government buildings.

Of course Beijing’s construction industry still lacks a green material supply chain and expertise. However, these things will develop as more of these buildings are constructed. And since most factories have already been moved from the capital, Beijing will have to go green in building to do its part in helping China conserve energy.

Thanks for the update on the Chengdu-Chongqing Economic Zone, Sascha. Having been to several of the 3rd and 4th tier cities in Sichuan you mentioned (Suining, Mianyang, Nanchong, etc..) I’ve often wondered how the prosperity in the region’s two dominant cities (Chengdu and Chongqing) would trickle into these other cities as well.

It seems as if most of the young ambitious Chinese people I meet from these cities who now live in Chengdu feel like there is nothing left for them in their hometowns. They also tell me that if they want to move ahead the best opportunities are found in Chengdu or Chongqing.

This isn’t to suggest that Chengdu and Chongqing will continue being the only cities absorbing all the region’s young, educated and ambitious talents. As is clear from what you wrote, the government is pushing for the prosperity to spread throughout the region. And given the enormous combined population of Sichuan Province/Chongqing Municipality at a whopping 110 million people, this is certainly a reasonable plan.

Unfortunately, observations on the ground often tell a different story. About a year and a half ago I was in a city called Jiangyou (famous as the hometown of the poet Li Bai and now actually considered a part of greater Mianyang) to meet with a housing developer for a potential new project. The developer had just finished building a series of faux Italian-style villas on the outskirts of town and reveled in showing us the finished product. No one had moved in yet, but the units were sold out.

Why anyone would buy these villas as anything other than a pure (risky) speculative investment is beyond me. Quality of life couldn’t possibly be a factor. Just outside the gates of the project, the developer drove us around in his brand new Mercedes-Benz to show us what is Jiangyou’s newly planned ‘center’. At this time, it was nothing more than block upon block of empty dirt lots, cleared away for new development. No people in sight except for a few construction workers taking a cigarette break. There were absolutely no amenities in the area and the air full of dust.

The developer then drove us to the real center of Jiangyou about 5km down the road. Finally, signs of life abounded as local residents went about their day in the downtown area. Though the downtown Jiangyou locals didn’t look like they suffered from abject poverty, a brand-new Mercedes with a young laowai passenger inside was enough to stop people in their tracks and turn a lot of heads.

We stepped out of the car and walked through the center of town, which was a series of 1-2 story ramshackle shacks that were destroyed in the 2008 Wenchuan Earthquake. The buildings were too damaged to be safely occupied, yet markets still flourished in the pedestrian street directly in between the collapsed buildings.

The juxtaposition of the physical damage with the bustling life on the street gave the place the feeling of a disaster zone frozen in time. Given the time since the earthquake struck, I wondered why there hadn’t been any progress on clearing out the damage.

I got my answer when the developer took us to Jiangyou’s planning department- a bland, 5-story grey building with peeling paint, typical of government of offices in China’s 3rd and 4th tier towns. Inside the building, there was not a soul in sight in the poorly lit hallways and stairwell until we got up to an office on the 3rd floor that reeked of stale cigarette smoke. A middle-aged man with a baijiu-belly offered us plastic cups of teas leaves with lukewarm water and introduced himself as one of the officials in charge of urban planning for the city. Maps of the city and region covering the walls of his office confirmed his position.

What we found out in that meeting is that despite an outward appearance that would suggest otherwise, the city of Jiangyou is rich. Or rather, the city government is sitting on top of piles of cash that was given to them by the central government as part of the Wenchuan Earthquake rebuilding effort. At that point, there was not much to show for the money they had received except for plans drawn up on paper. So far, our potential client, the developer of the luxury Italian villas had been one of the few in Jiangyou savvy enough to use his connections with the local government to gain favor and build the project, even though it was clear that the money might’ve been used for other, more pressing matters (e.g. clearing the rubble in downtown).

And while the planning official was soliciting master plans for redevelopment of the downtown area, most of the effort was still on developing the ‘new’ center with plans for new government offices and more luxury residential projects. I found it more than unfortunate that this took precedence over rebuilding the place where most of Jiangyou’s population lives.

Upon leaving Jiangyou, my Chinese colleague said something to me akin to “f*ck that guy”, in reference to the developer who showed us around. Apparently there was more going on than I could gather from my limited understanding of Chinese at the time. Yet despite these misunderstandings, the physical state of the city said enough about where the rebuilding money was going.

Ultimately, it is the countless smaller cities like Jiangyou that will determine the future success of China (it is also good to keep in mind that city size is relative, and although Jiangyou is ‘small’ by China standards, the population sits at almost 900,000 people). With the upcoming government leadership change and an economy that begs for an evolution in its level of transparency, the fate of the country lies within its urban areas, especially the ones not on the international or even national radar.

“Public policy, stripped to its basics, is a choice among value alternatives. What one person will vehemently contend is the correct policy and another will say is wrongheaded will not depend on empirical measurement, but on the person’s values, philosophy, and ideology.” – John Kasarda

While in the above quote Kasarda, business professor at UNC-Chapel Hill and co-author of the book Aerotropolis, refers to individual values, the same rule is also applicable to groups and institutions. This is certainly the case in the United States where the government is in the midst of tense negotiations over the so-called ‘debt ceiling’. America’s two main political factions, Republicans and Democrats, are currently at a loss of coming to a consensus due to ideological hangups.

Republicans, who favor severe austerity by cutting social programs yet oppose any sort of tax increases, are unwilling to compromise. The Republicans’ flawed ideological-based approach to solving America’s economic turmoil comes at perhaps one of the worst times in the country’s history with unemployment at an all-time high and millions losing social benefits. Even Vice President Joe Biden recently told Republican lawmakers that their “intransigence over taxes is a matter of ideology not economics“.

The Republicans’ approach to economic recovery is almost perfectly antithetical to what the Chinese government did in their response to the global downturn in 2008. It isn’t that the Chinese government ‘raised taxes’ or increased spending on ‘entitlements’- what they did do was stimulate their domestic economy through ordering banks to lend and beef up spending on national infrastructure and urban development. This ensured that the country kept on pace with modernization and kept its huge population busy and employed even while export manufacturing slowed.

China’s strategy in dealing with economic problems is inherently pragmatic and non-ideological. This may come as a shock to those in the west who still see China as representing a Marxist-based Communist ideology (also see “America’s Dangerously Out-of-Date View of China“). In fact it was Deng Xiaoping, China’s great reformer who famously said that “It doesn’t matter if a cat is black or white as long as it catches mice.”

It is important for those in western countries to understand that if it seems there is still residue of Maoist ideology lingering in China today it is merely rhetorical in nature- used by some in China’s leadership to appease dissatisfaction with class disparity and encourage a collective sense of meaning into its people. Don’t be fooled into thinking that China is in danger of reverting back to a time when intellectuals were forced to labor in the countryside or misinformed ideological-based policies resulted in famines.

Some commentators also predict that China has a ‘Sword of Damocles’ lingering over its head due to over-investment in fixed assets. Their predictions rest on the hope that once China’s economy crashes, it will once and for all prove the victory of the ‘free-market’ ideology over China’s ‘centrally planned’ model. Don’t bet on it.

Using ideology as a means to argue about which economic or political ‘system’ is superior is a relic of Cold-War mentality and completely irrelevant in today’s world. China knows this and other developing nations are starting to pick up on it. Unfortunately many in the west, and especially the United States, still feel they can justify moral superiority with their ‘system’. While in the past falling back on its narrative of ‘land of the free’ has worked for America, paying lip-service to a feigned moral superiority no longer holds as much weight.

Robert Herbold, former chief operating officer of Microsoft, picks up on this notion and writes a wake up call to the U.S. in a recent Wall Street Journal opinion piece titled “China vs. America: Which is the Developing Country?” Like many other executives and high-fliers who spend some time in China, Herbold is amazed by the country’s achievements and dismayed by America’s comparative lack of ambition . He concludes his piece by writing:

“Let’s face it—we are getting beaten because the U.S. government can’t seem to make big improvements. Issues quickly get polarized, and then further polarized by the media, which needs extreme viewpoints to draw attention and increase audience size. The autocratic Chinese leadership gets things done fast (currently the autocrats seem to be highly effective).“

Perhaps more discouraging than Herbold’s observations is the WSJ comments section, with most commenters overwhelmingly disagreeing with his assessment and some even resorting to ad hominem attacks. Despite what these anonymous commenters think, the facts are facts: China is moving ahead while the U.S. is falling behind. Herbold is spot on to call out the polarization of the U.S. government as being the primary reason this is the case.

Polarization within the U.S. government stems from the ideological preoccupation of both the dominant political parties. For instance, Republican lawmakers use the threatening rhetorical meme of ‘socialism‘ to argue their position for fiscal austerity. If taxes are raised and money is spent on public services (or even much-needed improvements to public infrastructure), the Republican theory goes, then the U.S. becomes a socialist state.

The Democrat side for its part has largely turned its back on small business and blue-collar workers: the party’s traditional backbone. Instead, the Democrats have succumbed to interests that work to stifle productive industry: namely the environmental lobby. While pandering to idealistic greens and the ‘knowledge-work will save us‘ cohort, the Democrats have more or less forgotten about the middle-class.

China and the rest of the developing world is not going to wait for America to get its house in order. It would be wise for leaders in both parties to acknowledge this cold hard reality and put aside ideological talking points during this moment of fiscal crisis in America. Unfortunately, that might be too much to ask in a culture which puts so much emphasis on election cycles and side-show campaigning.

To mark the 90th Anniversary of the founding of the Communist Party two weeks ago, the seaside city of Qingdao in Shandong province opened its new Jiaozhou Bay bridge. At 42.4 km, it is the longest sea bridge in the world. The bridge links historic Qingdao with the city’s industrial zone Huangdao.

On the same day, a 9.47 km undersea tunnel also opened linking the two sides together. As Steve Dickinson of the China Law Blog points out: “The completion of the bridge and tunnel fulfills the long term dream of the Qingdao government to fully integrate the two shores of the Jiaozhou Bay.“

“Nobody is even sure why either the bridge and the tunnel were built, much less the two of them. The bridge seems to be mostly aimed at connection by highway for goods from the ports and airport and tradezones. The tunnel does not provide access to any of this. The high toll for the tunnel means that it will not be used for normal surface transport (private cars and taxis). So why was it built? No one has ever been able to provide me with an explanation. Why was the bridge built at the WIDEST part of the bay? Why was it built when it only provides a 10 minute improvement in travel time? Why was it built with no attention to access and exit? Why were the connecting highways not improved? Who knows.”

Dickinson touches upon what is potentially the most contentious issue about China’s infrastructure: the seldom examined cost/benefit analysis of these new projects. At this point the world knows that China can ‘get it done’ when it comes to building large-scale infrastructure projects. There is no lack of political will or labor to undertake such ambitious plans. Yet lost in the speed of getting these new projects built is a rigorous analysis of the ultimate benefits for what could turn out to be a series of boondoggles.

That is not to suggest that this is not to be expected, especially given that China is a still a developing country. Surely, many of the infrastructure projects will have tremendous benefit now and in the future. I also posit that to some extent China’s leaders are aware of potential labor shortages in the future. As China’s aspiring middle-class urban dwellers move up the value chain, and as the one-child policy begins to take a toll on the country’s youthful demographics, cheap labor will become more scarce.

Given this reality, China appears to be taking an approach that puts speed and ambition above all other considerations, waiting to deal with the details later on. In a sense, this is a cultural phenomenon: creating an environment of rapid growth to ensure social stability and avoid the internal chaos that is still all too near in memory.